Navigating SFC’s Guidance on Private Market Assets: Key impacts on fund managers and next steps
On 3 September 2026, the Securities and Futures Commission (SFC) published a circular on SFC-authorised funds that may have exposure to private market assets (Circular).
We set out below the Circular’s key features, its impact, and the practical steps fund managers should take.
Background
Amid growing concerns about private credit and private equity, the SFC issued the Circular to managers of SFC-authorised funds to provide guidance on its expectations on product disclosure and classification for funds distributed in Hong Kong.
The SFC observed that investment funds may gain exposure to private credit and private equity (collectively, private market assets) for asset allocation and yield enhancement purposes. Such exposure may be gained directly through investments in bank or non-bank direct lending in the form of loans or equities to unlisted companies or indirectly through investments in business development companies[1] (BDCs), collateralised loan obligations[2] (CLOs) or financial derivative instruments (such as total return swaps (TRSs) on indices with exposure to leveraged loans or broadly syndicated loans or significant risk transfers with underlying assets that are corporate loans).
Private market assets are typically illiquid, harder to value and carry higher credit risks, with limited regulatory oversight. So, direct investments carry higher inherent risks than publicly listed securities. Indirect exposure may be perceived to be of lower risk – BDCs and CLOs are often seen as adequately liquid – but recent market developments have nonetheless raised concerns: rising default risks, widening net asset value (NAV) discounts and exposures that lack transparency or are too complex for retail investors.
Who does this Circular apply to?
The Circular applies to both UCITS and non-UCITS authorised by the SFC. Thus, all management companies of SFC-authorised funds should take note of the requirements under the Circular.
What are the key elements of the Circular?
The Circular covers:
(i) the level of disclosure required in offering documents (and where applicable, marketing materials) where a fund may have exposure to private market assets; and
(ii) whether a fund with exposure to private market assets will be classified as a “complex product” for distribution purposes.
What are the in-scope assets?
The in-scope assets are:
(i) Direct exposure: bank or non-bank direct lending in the form of loans or equities to unlisted companies.
For non-UCITs, direct exposure to private assets falls within the investment limit of 15% of a fund’s total NAV under 7.3 of the Code on Unit Trusts and Mutual Funds.
(ii) Indirect exposure: investments in BDCs, CLOs or certain financial derivative instruments.
The above examples are not exhaustive, and may be updated by the SFC from time to time.
What are the enhanced disclosure requirements?
Where an SFC-authorised fund may have direct or indirect exposure to private market assets, regardless of the level of actual or permitted exposure, its offering document (including the key fact statement (KFS)) must clearly disclose:
(i) the extent and means of access to the exposure — for example, “up to [x]% of the fund’s NAV is invested in listed BDCs which primarily invest in private market assets”; “[x–y]% of the fund’s NAV will gain exposure to private loans via investment in the senior tranche of CLOs”;
(ii) the nature and characteristics of the underlying private market assets — for example, the minimum credit rating of the CLOs in which the fund invests, or TRSs on an index comprising unsecuritised broadly syndicated loans; and
(iii) the key risks associated with exposure to the specific types of private market assets, including the impact and implications for the fund and its investors. Where appropriate (for example, where the fund may invest 30% or more of its NAV in private market assets), these key risks must also be included in the KFS.
These requirements apply to funds with any level of direct or indirect exposure to private market assets, including a small allocation via indirect instruments.
Where relevant, marketing materials may need enhancement under the SFC’s Advertising Guidelines Applicable to Collective Investment Schemes Authorized under the Product Codes, to remain fair and balanced with adequate risk disclosures.
What is the impact on fund classification for distribution purposes?
The Circular also refines when a fund is classified as a “complex product”.
Where a fund’s direct and indirect exposure to private market assets amount to 50% or more of the fund’s NAV, such fund will be considered as a complex product, regardless of its net derivative exposure.
The SFC will adopt a holistic, case-by-case approach: a fund may be designated as a complex product, even if its total private market asset exposure is less than 50% of its NAV, taking into account factors including without limitation:
(i) the aggregate direct and indirect exposure to private market assets;
(ii) the overall investment strategy, portfolio composition and liquidity and/or risk profile of the fund;
(iii) the extent, nature and characteristics of the specific asset types in which the fund invests; and
(iv) any distribution restrictions, requirements or other conditions as may be imposed by the fund’s home regulators.
Intermediaries distributing funds classified as complex products must, amongst other things, ensure the suitability of the fund for its investors, irrespective of whether any solicitation or recommendation is involved. They should refer to the SFC’s prevailing requirements for the sale of complex products as set out in the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, the SFC’s Guidelines on Online Distribution and Advisory Platforms, and the relevant frequently asked questions.
What else do managers need to be mindful of?
The SFC also reminded managers of their obligations under its “Guidance on Internal Product Approval Process” circular, last updated on 4 March 2016, covering the SFC’s expectations on product providers’ responsibility across the entire product life cycle, from product inception to post-sale obligations; with compliance confirmation built into the Information Checklist for Application for Authorisation of Unit Trusts and Mutual Funds.
The SFC particularly highlights managers’ obligations to identify the target market of funds which have exposure to private market assets, as well as distributor selection and ongoing training. Going forward, depending on the features of a fund (e.g. higher exposure to private market assets), the SFC may request additional information on a manager’s target market identification and distributor selection during the fund authorisation process.
What is the timeline for compliance?
For existing SFC-authorised funds that may have direct or indirect exposure to private market assets, managers should undertake a review of their funds and update the fund offering documents as soon as practicable. Managers should also ensure proper communication with the distributors.
If an existing fund will be re-classified as a complex product, prompt updates to offering documents and distributor communication are strongly encouraged.
What are the next steps?
As next steps, managers should:
(i) Review the Circular in detail and understand how it applies to their existing and proposed funds, monitoring for further SFC guidance.
(ii) Review fund investment objectives, policies and portfolios to ascertain any private market asset exposure, its means of access, and the extent of actual and maximum permitted exposure.
(iii) Review offering documents and enhanced them as needed; complete any updates as soon as practicable.
(iv) Communicate findings to distributors and provide additional training and/or training materials if needed. We would recommend keeping a record of any such communications.
(v) Review their internal product approval process to ensure it remains up-to-date and consistent with the SFC’s expectations.
(vi) When designing new funds, managers should consider expected private market asset exposure, strategies, portfolio composition, liquidity and risk profiles, and the implications for distribution and investor suitability — including whether the target market has sufficient knowledge and experience to understand the features and associated risks of the fund.
The Circular signifies the SFC’s commitment to investor protection without stifling managers’ investment flexibility in managing their funds.
[1] BDCs refer to close-ended funds registered under the US Investment Company Act of 1940, which primarily invest in debt and equity of small and mid-sized companies in the US.
[2] CLOs are securities backed by a pool of debt, typically leveraged loans and broadly syndicated loans, or direct lending to unlisted companies.
For further information, please contact:
Joyce Li, Partner, Deacons
